Fintech startups looking to upend how Americans do their banking are facing their first major test as interest rates fall and fearful consumers seek safety at traditional banks.

Square Inc. and Stripe Inc., mobile payments companies founded after the 2008 financial crisis, and digital banks including Chime Inc. and MoneyLion have never experienced a major market slump. The new industry, in other words, has yet to prove its business models can withstand a crisis.

Digital banks, which offer savings accounts, debit cards and other financial services without physical branches, attract new customers with low fees and high-yield savings accounts through partnerships with traditional banks. Chime’s rates are around 1.5%, according to its website, compared with 0.1% or lower at the biggest U.S. banks.

“It’s definitely going to be a challenge for them to keep paying those higher rates,” said Julie Chariell, a senior fintech and payments analyst at Bloomberg Intelligence. “They have less overhead because they don’t have branches and tellers, so they have more flexibility. But with rates coming down that much it’ll be hard to maintain.”

The Federal Reserve slashed its benchmark rate in an emergency 50-basis-point cut on March 3, and the entire U.S. yield curve fell below 1% for the first time ever on Monday.

The fear factor is another threat created by the market upheaval: Fintechs could lose customers, or fail to attract them, as depositors look for safer places for their cash.

Citigroup Inc. has been benefiting from a “flight to quality” that’s attracting customer deposits, Chief Financial Officer Mark Mason said at an investor conference Wednesday.

By contrast, as the coronavirus crisis intensified in recent weeks, digital investment platform Robinhood Financial Markets Inc. suffered three significant outages and drew down its entire $200 million credit facility to help weather the crisis. Chime faced widespread outages last year that kept customers from accessing their money, and some MoneyLion customers couldn’t log in to the app after a system update in November.

“The view of fintech overall from the industry perspective is being challenged — it’s the first time they’re going to go through this type of crisis,” said Julien Courbe, a partner at PricewaterhouseCoopers who focuses on the financial-services industry. “I think the skeptic view of fintech is just going to increase.”

MoneyLion is prepared, even though it’s never had to weather a market downturn, because the company was founded on the lessons of the 2008 financial crisis, Chief Executive Officer Dee Choubey said.

“Who we serve and how we serve them already positions us very well to acquire, keep and expand our customer base in turbulent times,” Choubey said in an email.

Square and Stripe didn’t respond to requests for comment, and a representative of Chime said the company had no immediate comment.

Credit Quality
Banking and payments startups also could be challenged by credit concerns. Many based their growth on lending to individuals and small businesses that struggled to get capital from traditional banks following the financial crisis. Square, for example, increased its loans to small vendors by 42% between 2018 and 2019.

“You have to think that small merchants are the ones at risk soonest if the economy really turns down,” Chariell at Bloomberg Intelligence said. “You have to wonder if that could set them off. It’s definitely new territory for them.”

Online personal-loan companies such as Social Finance Inc., which helps refinance student loans, are another question mark in a downturn because the default rate for alternative lenders is unknown, according to Alex Kern, a fintech analyst at CB Insights.

At the same time, banking startups have a lot of exposure to discretionary purchases. Consumer spending on travel, dining out and shopping has already fallen during the virus outbreak. That could worsen even after the spread of the virus subsides if the economy remains rattled.

The majority of revenue for digital banks comes from transaction fees when customers use debit cards linked to their accounts, Kern said. These companies are tied to consumers’ willingness to spend, and a downturn means less of that, he said.

— Olivia Rockeman (Bloomberg)